Burning costs to cool combined ratio for general insurers

With the combined ratio for motor vehicle damage or own damage business line crossing 100 per cent for Indian general insurers it is time for the sectoral regulator and the companies to take corrective action, said senior industry officials.

Simply put, combined ratio is claims + expenses divided by premium income.

Industry experts said the available options are - to arrive at the 'burning costs' - claims paid divided by premium income - for this portfolio and ask the insurers to charge those rates and also bring in risk-based capital norms.

There was no unanimity among the experts on the issue of business segment wise solvency norms and cap on combined ratio.

The motor vehicle insurance is divided into two parts - third party insurance which is compulsory and own damage which is optional.

For a long time, motor own damage insurance line was profitable for insurers but it turned negative owing to heavy discounts and excessive payments to select intermediaries.

"The combined ratio for the own damage business for the non-life insurance industry has crossed 100 per cent which is actually not a good sign," the head honcho of large insurer not wanting to be quoted told .

"The economics of the industry is bad. The own damage portion was the key component of the industry. Roughly the industry's premium break-up will be motor and health contributing 40 per cent each and the balance from other lines - life, fire, transit and others. Now 80 per cent (motor and health) business are loss making," the official added.

The Oriental Insurance Company Ltd Chairman-cum-Managing Director A.V. Girija Kumar had said the combined ratio of the own damage business for the industry is more than 100 per cent, due to heavy discounting and some short practices.

"The way out is to calculate the burning cost for all lines of business and make it public. The data for this is available with the Insurance Information Bureau of India (IIB). The GIC Re, largest provider of reinsurance support can replicate its fire insurance experience on other lines of business," R. Raghavan, former General Manager of General Insurance Corporation of India (GIC Re) and founder CEO of IIB told .

"Secondly, the risk-based capital regime should be introduced at the earliest, Raghavan said.

Not long ago the insurers offered fire insurance polices at dirt cheap rates with rebates going up to 97 per cent of the burning cost rate arrived at by IIB.

However, GIC Re turned the screws tight for reinsurance contracts from April 2019 telling the primary insurers that it would accept reinsurance placement only if their clients belonging to certain industries were charged a premium rate on burning cost basis.

The move had forced primary insurers to increase rates many times in some cases by nine times.

"In my understanding motor own damage rates and discounting factors are filed by insurers. The filing is required to have actuarial support. If the rates and discounts are varied from the ranges filed and approved and if the violations are found out IRDAI (Insurance Regulatory and Development Authority of India) can take action," K.K. Srinivasan, former Member, IRDAI told .

On the aspect of segment wise solvency ratio, Raghavan said in the place of current solvency norms which is largely thumb rule based one, the need is to bring in risk-based capital regime.

"Many international jurisdictions prescribe risk-based capital and there is an attempt to bring this here. As of now, if risk-based capital is adopted, it is expected that many insurers may require lesser capital adequacy," a senior industry expert not wanting to be quoted told .

"Now weighted factors are prescribed for every line of business and then consolidated to arrive at required solvency margin (RSM). Though the Insurance Act stipulates a solvency ratio of 1:1 (assets: liabilities), the IRDAI while issuing licence to a player directs that the available solvency margin (ASM) to be not less than 1.5 times of RSM," he added.

( With inputs from IANS )